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Touts of Medicare's low administrative costs are misleading

A recent caller to Neil Young's radio show, "The Advocates", claimed the administration cost for Medicare is much lower than for private insurance companies. Since government efficiency is not consistent with my experience, I investigated. It turns out that Medicare's formula for computing administration costs does NOT include all its real costs, costs which government demands are included in the calculations for private companies. So the comparison is not valid, and the claim is, at best, misleading.

The formula used to compute Medicare's administrative cost excludes more than half of its real costs: some of its management costs, policy setting costs done by Congress, tax and fee collection services provided by Social Security and the IRS, costs of capital, and many services provided by other government agencies.

If you try to compare these administrative costs, Medicare has some advantages. Medicare doesn't have to compete for clients, seniors are forced by buy it. Medicare doesn't offer a wide variety of policies to meet different customer needs but which increase costs. Medicare doesn't have to pay state and federal income taxes, real estate taxes, regulatory fees and compliance costs, taxes on premiums, collection costs, capital costs, commissions to sales people, and essentially it does no fraud prevention. Private companies spend money on effective fraud prevention to keep premiums low, and some offer disease management services which help customers, and but these value adds increase administration costs. Private companies need to maintain adequate reserves to cover unexpected expenses and meet regulatory requirements, and earn a return for their shareholders. Medicare doesn't.

Big government supporters will claim that profits are a big factor in private company administrative costs (profits are included in administrative costs). But, the combined profit of the top 10 (most from the top 5) health insurance companies is about $12.7-billion. $12.7-billion is small compared with the $48-billion or more that Medicare loses to fraud annually.

Medicare fraud, about 9-percent of the Medicare budget, is a cost borne by every Medicare recipient and taxpayer. Every administration claims they will reduce Medicare fraud, but none actually do. Medicare should have to spend to stop fraud. That would increase its administration cost but it would save taxpayer money.

There are various studies that compare Medicare and private company administrative costs. One study adjusts Medicare to include inappropriately excluded expenses and adjusts private company costs down to eliminate some factors not applicable to Medicare. The result is that Medicare costs come in at 6-8-percent versus 8.9-percent. The study comments that the private company provides extra value for the higher cost.

Another study acknowledges that there are a variety of ways to compare the administrative costs. They claim the correct comparison results in private company administrative costs being less expensive than Medicare.

The basic problem is that comparing the administrative costs of Medicare and private companies is like comparing apples to asparagus, they are just VERY different entities. Making a fair comparison would be very difficult, people would have to agree on many complex factors: what costs really constitute administrative costs, how to adjust for differences in client sizes and demographics, how to adjust for extra value services, to include or not include fraud costs, how to adjust for costs that government forces on private businesses but not on government entities, etc.

What do you call something that is so misleading that it gives a totally false impression? Is it a lie? Is it just misleading? Is it just taking advantage of people's ignorance?

Whatever you want to call it, the claim that Medicare's administrative expense is substantially less than private company administrative expense is so misleading as to give a totally false impression.